Are Global Banks in Trouble?

In a matter of just a few days, there were reports on bad bank loans in
two of two key global economies and MoneyShow's Jim Jubak
explains why he is concerned.

It's just a coincidence, but we're getting a lot of bank bad loan data, first
from Europe and then from China, separated by a couple of days. First, we got a
report from Pricewaterhouse Coopers, the big accounting agency that looked at
all of the European Banks, and basically, what it said, is that, well, you know,
bad loans at Eurozone banks have doubled in the last four years and they look
like they're continuing to rise, and said Coopers, a lot of banks are sitting on
a lot of assets they're calling non-core and they're going to sell those off,
about 1.2 trillion euros worth of those to be sold off over the next two, three,
four years. Banks have already started, said Pricewaterhouse Coopers. They sold
out about 48 billion of those loans in the first six months of 2013. That's more
than all of 2012.

What's the point of this exercise for me? Two things; one is that when banks
are getting rid of assets, whether they call them core or non-core, it means
they're not taking on as much in the way of new loans, so this is a damper on
growth. Banks that are worried about their bad loan ratios also don't do a lot
of new lending. They want to see those ratios go down, so they're trying to work
through those loans without taking on new ones. It's a damper on a fragile
European economy. The other part of this is that the European Central Bank is in
the process of doing its own audit of European Banks, and their asset positions,
and some stress tests, before they take over as regulator for a group of about
200, 250 of the largest banks. The question then is, "So, if we take the
Pricewaterhouse Coopers study for face value, saying there are a lot of bad
loans, what's the ECB going to do about that?" If they deliver a report that no
one believes, it will destroy the credibility even more after the last stress
test, so they don't have a whole lot left, so they don't really want to do that.
On the other hand, they don't want to make the picture seem so dire that it
really slows down growth in the Eurozone. Okay, that was on Monday.

On Wednesday, we had stories about the level of bad loans in Chinese
banks--that we've seen enough earnings reports from these banks to be able to
put some kind of numbers on it, and what we're seeing is bad loans rise at the
industrial and commercial Bank of China, which is the largest bank in the world
by market cap. We saw bad loans rise in September at an annualized rate of 30%.
Not a pretty picture. What we're also seeing is at some banks we're seeing
loans, this is at Bank of Communications for example, we're seeing bad loans
rise so fast so they're not making up a huge percentage of assets, but they're
rising faster than provisions, so that we saw bad loans at the Bank of
Communications rise and provisions for loans as a percentage go down.

These are not good pictures and what's interesting, and sort of a parallel to
Europe, is that the Chinese government is in the process of doing an audit, not
of the banks, but of local governments and their balance sheets. The local
government's got into a lot of lending through affiliated organizations. Unlike
the banks, they don't have loan loss provisions. The Beijing central
government's budget is their one and only backstop, so this will be very
interesting to see how deeply in the hole local governments are. The consensus
is that the hole is going to be very, very deep indeed and this, rather than the
rising problem of bad loans at banks, is the big problem in China.